BP's new chief warns of 'dreadful' third quarter

CEO reportedly plans restructure; fourth-quarter improvement seen

By

SimonKennedy

LONDON (MarketWatch) -- Tony Hayward, BP's new chief executive, has warned staff that the oil giant's third-quarter revenue will be "dreadful" and raised the specter of massive layoffs by pledging to simplify the corporate structure, a according to a published report.

Hayward issued his grim assessment during a "town-hall" staff meeting in Houston, saying the group's financial performance was its worst in more than 10 years, the Financial Times newspaper reported.

Shares of BP (BP)
BP, -0.55%
fell 2.7% to close at $69.33 on the New York Stock Exchange.

The company's London-traded shares also gave up ground, dropping 3.1%, with others in the European oil sector showing similar weakness as crude-oil prices receded. Shares of Royal Dutch Shell (RDSA)
RDS.A, -1.30%
lost 1.5% and Total (012027) gave up 1.6%. See Europe markets.

Hayward took over the top spot at BP from John Browne in May. Browne had lost a court battle to prevent a U.K. newspaper from publishing details of his private life. See archived story.

"What we are seeing here is a classic case of expectation management by a new management team while they still have a grace period with investors -- i.e., they can point the finger at Browne for all the problems," said Merrill Lynch analyst Mark Iannotti in a note to clients.

Hayward said he plans to consolidate BP's corporate into larger operating groups and reduce the number of layers of management, according to the report.

The newspaper quoted Hayward as saying that "there is massive duplication and lack of clarity of who does what." The CEO's comments were summarized by a BP manager in a note to colleagues, it added.

In the note, Hayward said he plans to reduce the number of BP's organization units and "reduce the number of layers from the workers up to the CEO from 11 to about seven." It offered no further details.

Bear Stearns energy analyst Nicole E. Decker said she doubts BP will make deep job cuts in its refining and marketing units.

While some head count reductions could take place through attrition, BP has already been accused of cutting corners and cost reductions in suits over a Texas City refinery explosion and other events, she said.

Hayward said missing revenues from its Texas City refinery -- where an accident in 2005 killed 15 workers -- and its Whiting refinery as well as delays in getting production started at some big projects were also partly to blame for its underperformance compared to rivals, the newspaper reported.

The firm has had to delay production at two projects in the Gulf of Mexico. But the start of production at one of those projects -- dubbed Atlantis -- should help drive an improvement in the fourth quarter, Hayward said.

The Atlantis project, as well as others in the Gulf of Mexico, Trinidad and Angola, should raise production levels by a further 250,000 barrels a day.

'Tone of the comments ... may raise investor concerns'

Hayward also reportedly said the Texas City and Whiting refineries should be back at full capacity by the end of the year. The company had previously said they wouldn't reach that capacity until 2008.

"The commentary around the results should not come as a surprise to investors given the well-publicized facts of Alaska and U.K. North Sea outages, low Rockies gas prices, and U.S. refineries still operating well below nameplate capacity," said Citigroup analyst James Neale in a note to clients.

"However the tone of the comments, and the need to impose major organizational changes, may raise investor concerns that the recovery in BP's fortunes will take longer than the market is currently discounting," he added.

Hayward also said the company needs to take well-judged risks.

Merrill's Iannotti suggested this could mean BP will step up its exploration budget, which is less than half that which Royal Dutch Shell has earmarked for discovering new supplies.

It could also indicate the pace of share buybacks may ease in favor of greater organic investment and more acquisition activity.

"Let's face it, this is where BP have had the most strategic success since the turn of the decade," Iannotti said.

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